IFRS Conversion Considerations: Provisions, Contingencies and Subsequent Events

Organizations considering a conversion to the International Financial Reporting Standards (IFRS) from U.S. Generally Accepted Accounting Policies (U.S. GAAP) should be aware of the different treatment for subsequent events and commitments and contingencies.

Subsequent events are generally treated in a similar manner between the two standards. Events that provide additional information on the conditions that existed at the balance sheet date are usually recorded at the reporting date. Significant events that occur after the reporting date but before issuance are generally disclosed, but not recorded in the financials. Under U.S. GAAP, subsequent events are evaluated through the date of the financial statement issuance, while IFRS requires an evaluation until the date the financial statements are authorized for issuance. Both standards require disclosure of the date through which subsequent events were evaluated.

Both standards implement a conservative approach, requiring the recognition of a loss based on the probability of occurrence and if a reasonable estimate of the loss can be determined. The definition of probable is different between the two standards. U.S. GAAP defines probable as “future events or events that are likely to occur,” while IFRS defines probable as “more likely than not,” which is a lower threshold. Both standards prohibit the recognition of costs associated with future operating activities. Both standards also require disclosures for contingent liabilities that have more than a remote likelihood of occurring, but lower than the probable threshold. Under U.S. GAAP, provisions may be discounted only when the amount and timing of the payments are fixed or readily determinable; however, under IFRS, significant provisions should be discounted based on the time value of money and the risk specific to the liability. Under U.S. GAAP, the most likely outcome of the provision within a range should be accrued. If all outcomes are as likely as others, then the minimum amount should be accrued. Under IFRS, the best estimate of the liability should be accrued, and the middle of a range should be used when all outcomes are as likely. This treatment could result in a higher accrual under IFRS.

Restructuring costs under U.S. GAAP are generally expensed as they occur, other than involuntary employee termination costs, which are expensed over the future service period or immediately if there is no future service period. Under IFRS, the approach is to analyze the entire restructuring plan, rather than individual costs. Therefore, costs are generally recognized earlier and should be recorded when management has committed to a detailed exit plan.

In connection with IFRS 1, First-Time Adoption of International Financial Reporting Standards, a first-time adopter must use estimates that are consistent with the estimates previously made under U.S. GAAP, after considering any changes to the accounting policies. The entity cannot apply any hindsight knowledge to make better estimates unless there is evidence that errors existed in the previous estimates and disclosures.

This article is the part of a series covering considerations for organizations contemplating a conversion from U.S. GAAP to IFRS. Schneider Downs provides assurance and advisory services for international entities and organizations following IFRS. For more information concerning international business matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].